TALLER SAN JOSE HOPE BUILDERStsjhopebuilders.org/wp-content/uploads/2018/11/...TALLER SAN JOSE HOPE...

June 30, 2018 and 2017

TALLER SAN JOSE HOPE BUILDERS

and Independent Auditors' ReportConsolidated Financial Statements

Independent Auditors' Report 2-3

Consolidated Financial Statements for the Years Ended June 30, 2018 and 2017

Consolidated Statements of Financial Position 4

Consolidated Statements of Activities 5

Consolidated Statements of Functional Expenses 6-7

Consolidated Statements of Cash Flows 8

Notes to the Consolidated Financial Statements 9-18

Supplemental Schedules

Schedule I - Consolidating Statement of Financial Position - June 30, 2018 20

Schedule II - Consolidating Statement of Financial Position - June 30, 2017 21

Schedule III - Consolidating Statement of Activities - Year Ending June 30, 2018 22

Schedule IV - Consolidating Statement of Activities - Year Ending June 30, 2017 23

TABLE OF CONTENTS

INDEPENDENT AUDITORS' REPORT

To the Audit Committee of the Board of Directors ofTaller San Jose Hope BuildersSanta Ana, California

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Taller San Jose Hope Builders (aCalifornia nonprofit organization, the Organization) and its subsidiary, which compromise the consolidatedstatements of financial position as of June 30, 2018 and 2017, and the related consolidated statements of activities, functional expenses, and cash flows for the years then ended, and the related notes to the consolidated financialstatements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements inaccordance with accounting principles generally accepted in the United States of America; this includes thedesign, implementation, and maintenance of internal control relevant to the preparation and fair presentation ofconsolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. Weconducted our audits in accordance with auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements. The procedures selected depend on the auditors’ judgment, including theassessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud orerror. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparationand fair presentation of the consolidated financial statements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating theappropriateness of accounting policies used and the reasonableness of significant accounting estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.

18012 Sky Park Circle, Suite 200Irvine, California 92614tel 949-852-1600fax 949-852-1606www.rjicpas.com

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Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, thefinancial position of Taller San Jose Hope Builders and its subsidiary as of June 30, 2018 and 2017, and thechanges in their net assets and their cash flows for the years then ended in accordance with accounting principlesgenerally accepted in the United States of America.

Other Matter

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as awhole. The supplementary information included in the accompanying Schedules I through IV is presented forpurposes of additional analysis and is not a required part of the consolidated financial statements. Suchinformation is the responsibility of management and was derived from and relates directly to the underlyingaccounting and other records used to prepare the consolidated financial statements. The information has beensubjected to the auditing procedures applied in the audit of the consolidated financial statements and certainadditional procedures, including comparing and reconciling such information directly to the underlyingaccounting and other records used to prepare the consolidated financial statements or the consolidated financialstatements themselves, and other additional procedures in accordance with auditing standards generally acceptedin the United States of America. In our opinion, the information is fairly stated in all material respects in relationto the consolidated financial statements as a whole.

Irvine, CaliforniaSeptember 24, 2018

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2018 2017ASSETS

Cash and cash equivalents 397,040$ 358,559$ Accounts receivable 75,945 124,519 Contributions and grants receivable, net 1,404,114 1,448,768 Inventory and construction in progress 7,729 26,331 Property held for resale 15,799 15,799 Investments 215,207 634,596 Property and equipment, net 1,166,260 1,164,925 Other assets 24,025 42,020

Total assets 3,306,119$ 3,815,517$

LIABILITIES AND NET ASSETS

LIABILITIESAccounts payable and accrued expenses 185,789$ 492,788$ Lines of credit 300,948 272,733 Installment contract payable 18,377 - Obligation under capital lease 62,676 -

Total liabilities 567,790 765,521

NET ASSETS

Unrestricted net assetsUndesignated 386,913 131,116 Designated for specific purposes 215,207 634,596

602,120 765,712

Temporarily restricted net assets 2,136,209 2,284,284

Total net assets 2,738,329 3,049,996

Total liabilities and net assets 3,306,119$ 3,815,517$

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARYCONSOLIDATED STATEMENTS OF FINANCIAL POSITION

June 30, 2018 and 2017

See accompanying notes to the consolidated financial statements- 4 -

UNRESTRICTED NET ASSETS2018 2017

Support and RevenueGrants and contributions 1,692,723$ 994,056$ Program service fees 737,724 1,000,442 Special events, net of direct benefit expenses of

$73,543 and $69,609, in 2018 and 2017, respectively 806,593 842,449 In-kind contributions 208,768 80,835 Investment income 6,451 16,907 Net unrealized gain on investments 38,505 83,512 Loss on disposition of property and equipment (3,035) (75,321)

Total support and revenue 3,487,729 2,942,880

Net assets released from restrictionsSatisfaction of program restrictions 1,618,284 2,162,470

Total unrestricted support, revenue, and assets released from restriction

ExpensesProgram services - general 3,307,589 3,301,230 Program services - construction 930,774 1,330,912 Management and general 399,155 469,982 Development and fundraising 632,087 568,769 Total expenses 5,269,605 5,670,893

Decrease in unrestricted net assets (163,592) (565,543)

TEMPORARILY RESTRICTED NET ASSETSGrants, pledges and contributions 1,470,209 2,445,701 Satisfaction of program restrictions (1,618,284) (2,162,470)

Increase (decrease) in temporarily restricted net assets (148,075) 283,231

Total Decrease in Net Assets (311,667) (282,312)

Net Assets at Beginning of Year 3,049,996 3,332,308

Net Assets at End of Year 2,738,329$ 3,049,996$

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARY CONSOLIDATED STATEMENTS OF ACTIVITIES

For The Years Ended June 30, 2018 and 2017

5,106,013 5,105,350


Program Program Management DevelopmentServices - Services - and andGeneral Construction General Fundraising Total

Compensation and related expenses 1,810,264$ 586,887$ 302,693$ 376,076$ 3,075,920$

Subcontractors and construction materials - 248,682 - - 248,682

Student support 505,976 - - - 505,976 Program supplies and

related expenses 196,744 1,472 - - 198,216 Supplies, printing and

office 74,468 3,433 11,626 9,447 98,974 Occupancy 383,696 5,278 18,897 18,896 426,767 Depreciation 110,861 18,177 656 - 129,694 Professional fees 107,000 22,923 56,844 186,767 Insurance 48,433 33,736 11,392 506 94,067 Computer supplies

and support 44,593 777 7,954 10,656 63,980 Interest 1,864 4,642 10,154 - 16,660 Special events - - - 85,966 85,966 Marketing, meetings

and conferences 23,690 25,883 9,885 73,281 132,739 Other - 1,807 2,975 415 5,197

3,307,589$ 930,774$ 399,155$ 632,087$ 5,269,605$

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARY CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES

For The Year Ended June 30, 2018


Program Program Management DevelopmentServices - Services - and andGeneral Construction General Fundraising Total

Compensation and related expenses 1,988,050$ 849,264$ 351,990$ 327,443$ 3,516,747$

Subcontractors and construction materials - 359,371 - - 359,371

Student support 437,867 297 - - 438,164 Program supplies and

related expenses 189,774 4,331 - - 194,105 Supplies, printing and

office 65,186 13,284 13,318 9,231 101,019 Occupancy 370,029 6,392 15,161 15,161 406,743 Depreciation 109,844 19,141 7,228 984 137,197 Professional fees 33,090 - 33,377 35,400 101,867 Insurance 45,737 36,929 10,585 506 93,757 Computer supplies

and support 32,196 225 8,477 8,220 49,118 Interest - 1,416 6,615 - 8,031 Special events - - - 86,451 86,451 Marketing, meetings

and conferences 29,448 39,952 22,279 82,443 174,122 Other 9 310 952 2,930 4,201

3,301,230$ 1,330,912$ 469,982$ 568,769$ 5,670,893$

For The Year Ended June 30, 2017

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARY CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES


2018 2017

CASH FLOWS FROM OPERATING ACTIVITIESChange in net assets (311,667)$ (282,312)$ Adjustments to reconcile decrease in net assets tonet cash used in operating activities:

Depreciation 129,694 137,197 Donated property and equipment (12,120) (4,030) Loss on disposition of property and equipment 17,784 75,321 Unrealized (gain) on investments (38,505) (83,512) Accrued interest on lines of credit 5,464 4,394 Change in operating assets and liabilities:

Accounts receivable 48,574 190,246 Contributions and grants receivable 44,654 (157,500) Inventory and construction in progress 18,602 (62,830) Other assets 17,995 34,228 Accounts payable and accrued expenses (306,999) 143,663

NET CASH USED IN OPERATING ACTIVITIES (386,524) (5,135)

CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment (66,146) (56,003) Proceeds from board designated sustainability fund 635,000 250,000 Purchase of investments for designated gifts (173,992) (41,000) Reinvested dividends (3,114) (7,291)

NET CASH PROVIDED BY INVESTING ACTIVITIES 391,748 145,706

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from installment contract payable 21,807 - Repayments of installment contract payable (3,430) - Repayments of capital lease obligation (7,871) - Borrowings on lines of credit 55,000 140,000 Repayments of note payable (32,249) (170,000)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 33,257 (30,000)

NET INCREASE IN CASH AND CASH EQUIVALENTS 38,481 110,571

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 358,559 247,988

CASH AND CASH EQUIVALENTS AT END OF YEAR 397,040$ 358,559$

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for interest 16,660$ 3,637$

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Property and equipment acquired by entering into capital lease arrangement 70,547$ -$

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended June 30, 2018 and 2017


TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARYNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

NOTE A - ORGANIZATION AND MANAGEMENT'S PLAN

Taller San Jose Hope Builders (TSJHB or the Organization) was opened in 1995 to provide learning and vocational training foryouth in Santa Ana, California and the surrounding communities. At-risk youth and young adults in Orange County who have notcompleted their secondary education and who do not have sufficient job skills to earn a living wage are encouraged to finish theireducation to gain some specific job skills, to set clear goals for their lives and to move on to productive adulthood. TheOrganization was incorporated in August 2005. The sole member of the Organization is the Sisters of St. Joseph of Orange(SSJO). As such, SSJO fully controls the Organization.

Hope Builders Construction Company (HBCC) was incorporated under the laws of the State of California on May 24, 2006. Itwas originally incorporated as a profit making corporation, but on December 26, 2012, it reorganized as a nonprofit public benefitcorporation. As part of the reorganization, it became a membership organization, and Taller San Jose Hope Builders is the onlymember. HBCC received tax-exempt status under federal law as a subordinate organization as defined in Section 501(c)(3) of theInternal Revenue Code.

HBCC was a licensed general contracting venture employing graduates of the Organization in an effort to further refine their skillsenhancing their ability for a productive future. In March, 2018, HBCC ceased its general contracting activities, and no longer doescontracting work for the public. However, it continues to employ interns to help them refine their skills. In partnership withemployers, interns are placed at employers' sites as a continuing part of their training, and employers pay HBCC based onplacements.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Permanently restricted net assets consist of funds that contain donor-imposed restrictions requiring the principal to be invested inperpetuity and that only the income be used. Income earned on these funds may be unrestricted or temporarily restricted,depending upon the donor-imposed restrictions. There were no permanently restricted net assets at June 30, 2018 or 2017.

In April 2016, the Organization expanded its operations with a new facility in Anaheim, California and anticipated significantprogram expansion. The strategic plan projected a gap in revenue in the early years and anticipated the use of the Organization’ssustainability fund. Over the past three years, revenues have increased in support of the expansion, but at a slower rate thanprojected. The current year’s decrease in net assets of approximately $312,000 reflects a decrease of $63,000 from its primaryoperations, and $249,000 from HBCC, its social enterprise. Heading into fiscal year 2019, we have curtailed certain expendituresto a less than conservative revenue projection, and any additional program expansion has been postponed until revenues grow.Additionally, in December 2017, the Board of Directors and management for HBCC decided to cease contracting operations inMarch 2018. As a result of these changes, management believes the Organization will generate significant support and revenues,net of expenses, and generate adequate cash flows to maintain operations at the current level for the foreseeable future.

The consolidated financial statements include the accounts of the Taller San Jose Hope Builders and its subsidiary, Hope BuildersConstruction Company together, the Organization. All material inter-organization transactions and balances have been eliminatedin consolidation.

Net Asset Classifications

The Organization reports information regarding its financial position and activities according to three classes of net assets:unrestricted, temporarily restricted, and permanently restricted.

Net assets of the restricted class are created only by donor-imposed restriction on their use. All other net assets, including Board-designated amounts, are legally unrestricted, and are reported as part of the unrestricted class.

Unrestricted net assets consist of funds that are fully available for the Organization to utilize in any of its programs or supportingservices at the discretion of the Board of Directors.

Temporarily restricted net assets consist of funds that are restricted by donors for a specific time period or purpose.

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June 30, 2018 and 2017

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Support and Revenue

All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts receivedthat are designated for future periods or restricted by the donor for specific purposes are reported as additions to temporarilyrestricted or permanently restricted net assets. When a temporary restriction has been satisfied, the related temporarily restrictednet assets are reclassified to unrestricted net assets and reported in the statement of activities as "satisfaction of programrestrictions."

When donor restriction on contributions are satisfied in the same period as the receipt of the contribution, the Organization reportsboth revenue and the related expense in the unrestricted net asset category.

Grants are received from various governmental agencies and private foundations. The majority of grant funds are used forprogram related purposes and improvements to facilities owned by the Organization and are treated as current period revenues and expenditures.

Promises to Give

Unconditional promises to give are reported at fair value at the date the promise is received. Conditional promises to give arerecognized when the conditions on which they depend are substantially met. Management believes that all promises to give as ofJune 30, 2018 and 2017 were fully collectible; therefore, no allowance for doubtful promises to give has been recorded.

Donated Goods and Services

Donated goods and services (in-kind contributions) are recorded at their estimated market values at the date of receipt.Contributions of services are recognized if the services received create or enhance nonfinancial assets or require specialized skills,are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. For theyears ending June 30, 2018 and 2017, donated goods and services received by the Organization meeting the above criteria werevalued at $208,768 and $80,835, respectively, which were primarily related to donated professional services, auction items for theannual Light Up a Life special event, and instructors and tutors for the Organization's programs.

Accounts Receivable

Accounts receivable are recorded when contract provisions are met, and the supporting organization is obligated to remit paymentsto the Organization. Management performs periodic credit evaluations of its receivable balances and records an allowance fordoubtful accounts when it is probable that all or a portion of the receivable will not be collected. Management believes that allaccounts receivable as of June 30, 2018 and 2017 were fully collectible; therefore, no allowance for doubtful accounts has beenrecorded.

Retentions Receivable

Certain construction contracts contain provisions for a percentage of progress billings to be held by the customer until a certainperiod after completion of the work. As of June 30, 2018 and 2017, the amount of retentions receivable were $0 and $14,972respectively, and these amounts are recorded as a component of accounts receivable on the accompanying consolidated.statements of financial position.

Grants Receivable

Grants receivable are recorded when an obligation from a granting agency is committed in writing and when qualifyingexpenditures are made in connection with grants that provide for reimbursement of such expenditures. Management believes thatall grants receivable as of June 30, 2018 and 2017 were fully collectible; therefore, no allowance for doubtful grants has beenrecorded.

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June 30, 2018 and 2017


Functional Allocation of Expenses

Property held for resale is recorded at cost, if purchased, or fair value on the date of receipt, if donated, which approximates fairvalue.

Inventory and Construction in Progress

Inventory is stated at the lower of cost and net realizable value, determined using the first-in, first-out method. Construction inprogress relates to work in progress for HBCC and represents revenues recognized in excess of amounts billed.

The costs of providing various programs and other activities have been summarized on a functional basis in the consolidatedstatements of activities and the consolidated statements of functional expenses. Accordingly, certain costs have been allocatedamong the program and supporting services benefited.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Organization considers all unrestricted highly liquid investmentswith an initial maturity of three months or less to be cash equivalents.

Investments

Investments and marketable securities with readily determinable fair values and all investments in debt securities are reported atfair market value.

Property Held for Resale

Property and Equipment

Donations of property and equipment are recorded as support at their estimated fair value. Such donations are reported asunrestricted support unless the donor has restricted the donated asset to a specific purpose or stipulated how long the assets mustbe used. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquireproperty and equipment are reported as restricted support. Absent donor stipulations regarding how long those donated assets mustbe maintained, the Organization reports expirations of donor restrictions when the donated or acquired assets are placed in serviceas instructed by the donor. The Organization reclassifies temporarily restricted net assets to unrestricted net assets at that time.The Organization has elected to capitalize all property with a value of $1,000 or more and with a useful life expectancy of at least3 years. Expenditures for repairs and maintenance are expensed as incurred. Purchased property and equipment are stated at cost.Property and equipment are depreciated using the straight-line method over their estimated useful lives. Assets under capital leasearrangements are recorded at the present value of the minimum lease payments and are amortized on the straight-line method overthe shorter of the useful life or the lease term.

Impairment of Long Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount maynot be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carryingamount of the asset, an impairment loss is recognized and measured using the fair value of the related asset. As of June 30, 2018and 2017, the Organization did not identify any material impairment of its long-lived assets.

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June 30, 2018 and 2017

Income Tax Status

The Organization is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and similar provisionsof the State of California Revenue and Taxation Code. However, income from certain activities not directly related to theOrganization’s tax-exempt purpose, if any, is subject to taxation as unrelated business income. In addition, the Organizationqualifies for the charitable contribution deduction under Section 170b(b)(1)(A) and has been classified as an organization otherthan a private foundation under Section 509(a)(2).

HBCC received tax-exempt status under federal law as a subordinate organization defined in Section 501 (c)(3) of the InternalRevenue Code, and similar status under provisions of the State of California Revenue and Taxation Code.

U.S. federal tax returns for the tax years 2014 through 2017 and state tax returns for the tax years 2013 through 2017 remain opento examination.


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,Revenue from Contracts with Customers ("ASU 2014-09"), which is effective for non-public entities for annual reporting periodsbeginning after December 15, 2018, as amended. The new revenue recognition standard provides a five-step analysis oftransactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue todepict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services. ASU 2014-09 shall be applied retrospectively to each periodpresented or as a cumulative-effect adjustment as of the date of adoption. The Organization is currently evaluating the impact ofthe adoption of ASU 2014-09 on the consolidated financial statements and has not determined the method of adoption or theimpact of such adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees to recognize almost all leases ontheir balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model,requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar tothose applied in current lease accounting pronouncements today, but without explicit bright lines. Lessor accounting is similar tothe current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. ThisASU is effective for non-public entities for fiscal years beginning after December 15, 2019, including interim periods within thosefiscal years. The Organization is currently evaluating the potential impact this standard will have on their consolidated financialstatements and related disclosures.

The Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) 740, Income Taxes , prescribes arecognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return that is not certain tobe realized. The Organization believes that it has appropriate support for income tax positions taken, therefore, management hasnot identified any uncertain income tax positions.


Management Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the consolidated financials statements and the reportedamounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Concentration of Credit Risk

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, deposits of up to $250,000 at FDIC-insured financialinstitutions are covered by FDIC insurance. At times, deposits may be in excess of the FDIC insurance limits; however,management does not believe the Organization is exposed to any significant related credit risks.

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June 30, 2018 and 2017

Total

Level 1 Level 2 Level 3

Fixed income funds $ 86,088 $ - $ 86,088 $ -

Equity funds and common $ 129,119 - 129,119 - $ 215,207 $ - $ 215,207 $ -

Fixed income funds $ 370,687 $ - $ 370,687 $ -

Equity funds and common 263,909 - 263,909 - $ 634,596 $ - $ 634,596 $ -


In August 2016, the FASB issued ASU 2016-14; Not-for-Profit Entitie s (Topic 958), which will improve the current net assetclassification requirements and the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s)liquidity, financial performance, and cash flows. The FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholdersindicated that existing standards for financial statements of NFPs are sound, but could be improved to provide more usefulinformation to donors, grantors, creditors, and other users of financial statements. The amendments in this ASU are effective forannual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal yearsbeginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year ofapplication. Early application of the amendments in this ASU is permitted. The Organization is currently evaluating the potentialimpact this standard will have on their consolidated financial statements and related disclosures.

Management does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have amaterial effect on the Organization’s present or future consolidated financial statements.

The following table sets forth by level, within the fair value hierarchy, the Organization's investments at fair value as of June 30,2018 and 2017:

June 30, 2018

June 30, 2017

NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Organization determines the fair market values of its investments based on the fair value hierarchy established in FASB ASCTopic 820, Fair Value Measurements . The statement requires fair value to be classified and disclosed in one of the followingthree categories:

Level 1 - Quoted prices in active markets for identical assets and liabilities, including equity and debt securities and derivativecontracts that are traded in an active exchange market.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices inmarkets that are not active; or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of theassets or liabilities.

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June 30, 2018 and 2017

2018 2017 $ 1,065,584 $ 1,065,584

735,020 751,915622,436 574,224149,998 146,907

2,573,038 2,538,6301,406,777 1,373,705

$ 1,166,260 $ 1,164,925

NOTE D - CONTRIBUTIONS AND GRANTS RECEIVABLE

Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value.Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimatedfuture cash flows. The discounts on those amounts are computed using risk-free interest rates applicable to the years in which thepromises are received. Conditional promises to give are not included as support until the conditions are substantially met.

As of June 30, 2018, contributions and grants receivable of $928,114 were expected to be received within one year, and $520,000is expected withn one to five years. There is a discount for long term pledges of $44,000, and no allowance for doubtful accounts,as management expects they are fully collectable. As of June 30, 2017, contributions and grants receivable of $737,628 wereexpected to be received within one year, and $793,140 is expected withn one to five years. There is a discount for long termpledges of $82,000, and no allowance for doubtful accounts, as management expects they are fully collectable.

Less accumulated depreciation

Depreciation expense was $129,694 and $137,197 for the fiscal years ended June 30, 2018 and 2017, respectively.

NOTE F - PROPERTY HELD FOR RESALE

NOTE E - PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of June 30:

Land and buildingBuilding improvements and renovationsEquipment, furniture and fixturesVehicles

The Organization owns one undeveloped residential property donated by a lender through a distressed property program, with acarrying value of $15,799 as of June 30, 2018 and 2017.

NOTE G - INVESTMENTS

HBCC is a 50.1 % owner and one of three members of HBCV, LLC, (the LLC) which was organized in August 2014 to purchase,refurnish, and develop housing for low-income families and seniors while offering work experience and employment opportunitesto young adults. One of the other members has been appointed the Manager, who controls day to day operations and financialpolicies of the LLC. TSJHB, while it owns 50.1%, does not control any aspect of the LLC, and as a result, its has not beenconsolidated into these consoldiated financial statements.

As of June 30, 2018 and 2017, HBCV, LLC has purchased and is operating one home as an affordable housing unit. The purchaseprice and rehabilitation costs were financed by the County of Orange, with a 55 year nonrecourse loan. The LLC collects the rentand subsidy on the property, pays all expenses, and distributes the proportionate share of the excess to the members according totheir ownership annually, after reserving an appropriate amount for working capital. For the years ending June 30, 2018 and 2017,the income to HBCC was $3,310 and $9,615, respectively.

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June 30, 2018 and 2017

2018 2017 $ 18,377 $ -

2019 $ 15,782 2020 15,782 2021 15,782 2022 15,782 2023 6,048

69,178 (6,502) $ 62,676

Equipment $ 70,547 (8,231) $ 62,316

As of June 30, 2018, the gross amount of equipment and related amount of accumulated amortization recorded under the capitallease was as follows:

Amortization of assets held under capital lease is included within depreciation expense.

Less Accumlated Amortization

Future minimum lease payments are as follows for the years ending June 30:

The Company leases certain equipment under a capital lease arrangement. The lease term runs through November 2022.

Less amount representing interest at 4.5%Present value of net minimum capital lease payments

Total minimum lease payments

The Organization entered into an installment contract payable in connection with the acquisition of a vehicle, payable in monthlyinstallments of principal and interest of $430, bearing interest at 6.69%, and due July 2022.

Outstanding balance as of June 30:

On June 15, 2014, the Organization entered into a loan agreement with Orange County Community Foundation to provide up to$100,000 in working capital for large projects of HBCC. Advances bore interest at 2.5% to be paid on a quarterly basis.Advances under this agreement were to be made through June 30, 2016, and any outstanding balance must be paid in full by June30, 2017. During the year ended June 30, 2016, $100,000 was advanced and was outstanding as of June 30, 2016. The loan wasentirely repaid as of June 30, 2017.

NOTE H - LINES OF CREDIT

In April 2008, the Organization secured a line of credit with St. Joseph Health System that has been renewed every five years. Asof July 1, 2016, the line of credit carried a limit of $300,000 and bore interest at 2.17% per annum and maturity date of April2018.

The line was amended with Providence St. Joseph Health Investment Trust in April 2018 to increase the limit to $600,000, theinterest rate to 3.0% per annum, and extend the maturity date to April 2023. The line is secured by a Deed of Trust recorded onthe building which houses the Organization's construction program. As of June 30, 2018 and 2017, $300,948 and $272,733,respectively, was outstanding under this line of credit.

NOTE I - INSTALLMENT CONTRACT PAYABLE

NOTE J - CAPITAL LEASE OBLIGATION

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June 30, 2018 and 2017

2018 2017

$ 215,207 $ 634,596

Anaheim expansion 874,611 1,187,484 1,261,598 1,096,800 $ 2,136,209 $ 2,284,284

Funds designated for specific purposes - See Note N

NOTE K- RETIREMENT PLAN

The Organization offers employees the opportunity for participation in a contributory retirement plan. The Organization matchesemployees’ contributions up to 1% of their regular salary, and also contributes up to 8% of their salary, based on years of service.The expense to the Organization under this arrangement for the fiscal years ended June 30, 2018 and 2017 was $100,464 and$91,732, respectively.

NOTE L - NET ASSETS

Unrestricted net assets which have been designated by management for specificpurposes:

The Organization received contributions totaling $98,840 and $205,362 from members of the Board of Directors during the yearsended June 30, 2018 and 2017, respectively.

Temporarily restricted net assets are available for the following purposes:

Grant requirements

NOTE M - RELATED PARTY TRANSACTIONS

The Organization has transactions with SSJO, which is related due to common control and members of Boards of Directors. TheOrganization does not have the right, however, to appoint Board members for those organizations. SSJO has the right to appointBoard members of TSJHB and approval rights to certain transactions. SSJO also controls the St. Joseph Healthcare Foundation(SJHF). The Organization also shares a history of founding and support with Providence St. Joseph Health (PSJH). Historically,the Organization has relied upon these organizations to supplement its operations through grants, loans, and loan guarantees.During the years ended June 30, 2018 and 2017, the Organization reimbursed SSJO for certain staff and employee benefit relatedcosts in the amount of $91,409 and $94,858, respectively. These costs are included as a component of compensation and relatedexpenses in the accompanying consolidated financial statements.

SSJO has supported the Organization since its inception and continues to do so. For the years ended June 30, 2018 and 2017,SSJO's contributions totaled $168,653 and $152,302 respectively.

PSJH and its hospitals and SJHF also support the Organization. For the years ended June 30, 2018 and 2017, SJH's contributionstotaled $166,697 and $268,500 respectively. In addition, the Organization reimbursed SJH for certain employee benefit relatedcosts and insurance in the amount of $557,649 and $575,801, respectively. These costs are included as a component ofcompensation and related expenses and insurance in the accompanying consolidated financial statements. SJH also provides a lineof credit to the Organization (See Note H).

- 16 -


June 30, 2018 and 2017

2018 2017 $ 634,596 $ 748,436 41,619 95,160 173,992 41,000 (635,000) (250,000) $ 215,207 $ 634,596

2019 175,044 2020 180,293 2021 106,988

$ 462,325

The Organization received contributions in 2009 (referred to as the Legacy Fund) that were permanently restricted by the donors.In 2011, the Legacy Fund was transferred to the Orange Catholic Foundation (OCF) to be held in perpetuity. The income earnedfrom the Legacy Fund investments is available to be expended to support the various programs and ministries of the Organizationonce the balance reaches $250,000. As of June 30, 2018 and 2017, the balance in the Legacy Fund was $77,566 and $71,563respectively.

NOTE O - OPERATING LEASE COMMITMENTS

The Organization leases its office facility in Anaheim under a five year operating lease that expires in January 2021. Total rentexpense for the years ended June 30, 2018 and 2017 was $241,459 and $239,637, respectively.

Future minimum rental obligations under this lease is as follows for the years ending June 30:

Fund net assets, beginningUnrealized gain on investments

Amounts appropriated for expenditureFund net assets, ending

Permanent Endowment Fund

Amounts contibuted for sustainability

NOTE N - SUSTAINABILITY FUNDS

Board Designated Sustainability Fund

The Board of Directors established an endowment fund (quasi-endowment) in 2001 as part of unrestricted net assets. It wasdesignated by the Board of Directors to be maintained as an endowment fund subject to the Organization's investment andspending policies. In March, 2017, the Board determined the intent was actually for a sustainability fund, to support the operations of the Organization. The Fund was renamed the Sustainability Fund. It continues to be Board-designated, and requires Boardapproval for additions and withdrawals.

Sustainability funds are invested in marketable securities pursuant to the Organization’s investment and spending objectives ofpreserving capital, maintaining liquidity, maximizing long-term total return, and exercising principled purchasing in accordancewith the values of the Organization. The disbursement policy calls for transferring 3.5% of the value of the fund each yearaccording to a moving average formula, once the balance exceeds the required months of working capital. The Board of Directorsmay elect to increase this amount through its annual budgeting process.

The composition of net assets for this fund as of June 30, 2018 and 2017 and the changes in endowment net assets for thecorresponding years are as follows:

- 17 -


June 30, 2018 and 2017

Management has evaluated subsequent events through September 24, 2018 the date the consolidated financial statements wereavailable to be issued and determined there are no material subsequent events that require recognition or disclosure in theconsolidated financial statements.

NOTE P - CONTINGENCIES

The Organization receives a significant portion of its revenues from government grants and contracts, which are subject to audit bythe grant making agencies. Until such audits have been completed and final settlements determined, there exists a contingency torefund any amount received in excess of allowable costs. Management believes that no material liability will result from suchaudits.

The Organization is periodically involved in various claims and legal actions arising in the ordinary course of business. In theopinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Organization'sconsolidated financial position or the results of its operations.

NOTE Q - SUBSEQUENT EVENTS

- 18 -

SUPPLEMENTAL SCHEDULES

Schedule I

Taller San Jose Hope Builders

Hope Builders Construction

CompanyConsolidating

EntriesConsolidated

TotalsASSETS

Cash and cash equivalents 332,960$ 64,080$ -$ 397,040$ Accounts receivable 68,987 6,958$ - 75,945 Contributions and grants receivable, net 1,404,114 -$ - 1,404,114 Inventory and construction in progress 7,729 -$ - 7,729 Property held for resale 15,799 -$ - 15,799 Investments 215,207 -$ - 215,207 Property and equipment, net 1,137,746 28,514$ - 1,166,260 Due from Hope Builders

Construction CompanyOther assets 24,025 -$ - 24,025

Total assets 4,600,577$ 99,552$ (1,394,010)$ 3,306,119$

LIABILITIES Accounts payable and accrued expenses 149,567$ 36,221$ -$ 185,789$ Line of credit 300,948 - - 300,948 Obligation under capital lease 62,676 - - 62,676

Installment contract payable - 18,377 - 18,377 Due to Taller San Jose Hope Builders - 1,181,289 (1,181,289) -

Total liabilities 513,191 1,235,887 (1,181,289) 567,790

NET ASSETSUnrestricted net assets

Undesignated 1,735,970 (1,136,335) (212,721) 386,913 Designated for specific purposes 215,207 - - 215,207

1,951,177 (1,136,335) (212,721) 602,120 Temporarily restricted net assets 2,136,209 - - 2,136,209

Total net assets 4,087,386 (1,136,335) (212,721) 2,738,329

Total liabilities and net assets 4,600,577$ 99,552$ (1,394,010)$ 3,306,119$

(1,394,010) -

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARYDETAILS OF CONSOLIDATION

STATEMENT OF FINANCIAL POSITION June 30, 2018

1,394,010

See independent auditors' report- 20 -

Schedule II




EntriesConsolidated

TotalsASSETS

Cash and cash equivalents 315,110$ 43,449$ -$ 358,559$ Accounts receivable, net 124,519 - 124,519 Contributions and grants receivable, net 1,448,768 - - 1,448,768 Inventory and construction

in progressProperty held for resale 15,799 - - 15,799 Investments 634,596 - - 634,596 Property and equipment, net 1,164,336 589 - 1,164,925 Due from Hope Builders

Construction Company

Other assets 42,020 - - 42,020 Total assets 4,770,381$ 185,959$ (1,140,823)$ 3,815,517$

LIABILITIES Accounts payable and accrued expenses 347,598$ 145,190$ -$ 492,788$ Line of credit 272,733 - - 272,733

Due to Taller San Jose Hope Builders - 928,102 (928,102) - Total liabilities 620,331 1,073,292 (928,102) 765,521

NET ASSETSUnrestricted net assets

Undesignated 1,231,170 (887,333) (212,721) 131,116 Designated for specific purposes 634,596 634,596

1,865,766 (887,333) (212,721) 765,712

Temporarily restricted net assets 2,284,284 - - 2,284,284

Total net assets 4,150,050 (887,333) (212,721) 3,049,996

Total liabilities and net assets 4,770,381$ 185,959$ (1,140,823)$ 3,815,517$

1,140,823 - (1,140,823) -

8,929 17,402 - 26,331

STATEMENT OF FINANCIAL POSITION June 30, 2017

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARYDETAILS OF CONSOLIDATION


Schedule III




EntriesConsolidated

TotalsUNRESTRICTED NET ASSETSSupport and Revenue

Grants and contributions 1,692,723$ 100,000$ (100,000)$ 1,692,723$ Program service fees 207,141 596,775 (66,192) 737,724 Special events, net 806,593 - - 806,593 In kind contributions 208,768 - - 208,768 Investment income 3,141 3,310 - 6,451 Net unrealized gain on investments 38,505 - - 38,505 Loss on disposition and equipment (3,035) - - (3,035) Total support and revenue 2,953,836 700,085 (166,192) 3,487,729

Net assets released from restrictionsSatisfaction of program restrictions 1,618,284 - - 1,618,284

Total unrestricted support, revenue, and assets released from restriction 4,572,120 700,085 (166,192) 5,106,013

ExpensesProgram services - general 3,307,589 - - 3,307,589 Program services - construction 147,878 949,088 (166,192) 930,774 Management and general 399,155 - - 399,155 Development and fundraising 632,087 - - 632,087 Total expenses 4,486,709 949,088 (166,192) 5,269,605

Increase (decrease) in unrestricted net assets 85,411 (249,003) - (163,592)

TEMPORARILY RESTRICTED NET ASSETSGrants, pledges and contributions 1,470,209 - - 1,470,209 Satisfaction of program restrictions (1,618,284) - - (1,618,284)

Decrease in temporarily restricted net assets (148,075) - - (148,075)

Total decrease in Net Assets (62,664) (249,003) - (311,667)

Net Assets at Beginning of Year 4,150,050 (887,333) (212,721) 3,049,996

Net Assets at End of Year 4,087,386$ (1,136,336)$ (212,721)$ 2,738,329$

DETAILS OF CONSOLIDATIONSTATEMENT OF ACTIVITIES

For the Year Ended June 30, 2018

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARY


Schedule IV




EntriesConsolidated

TotalsUNRESTRICTED NET ASSETSSupport and Revenue

Grants and contributions 994,056$ 150,000$ (150,000)$ 994,056$ Program service fees 107,466 976,247 (83,271) 1,000,442 Special events, net 842,449 - - 842,449 In kind contributions 80,835 2,000 (2,000) 80,835 Investment income 7,292 9,615 - 16,907 Net unrealized gain on investments 83,512 - - 83,512 Loss on disposition and equipment (75,321) - - (75,321) Total support and revenue 2,040,289 1,137,862 (235,271) 2,942,880

Net assets released from restrictionsSatisfaction of program restrictions 2,162,470 - - 2,162,470

Total unrestricted support, revenue, and assets released from restriction 4,202,759 1,137,862 (235,271) 5,105,350

ExpensesProgram services - general 3,301,230 - - 3,301,230 Program services - construction 282,115 1,284,068 (235,271) 1,330,912 Management and general 469,982 - - 469,982 Development and fundraising 568,769 - - 568,769

Total expenses 4,622,096 1,284,068 (235,271) 5,670,893

Decrease in unrestricted net assets (419,337) (146,206) - (565,543)

TEMPORARILY RESTRICTED NET ASSETSGrants, pledges and contributions 2,445,701 - - 2,445,701

Satisfaction of program restrictions (2,162,470) - - (2,162,470) Increase in temporarily restricted net assets

283,231 - - 283,231

Total decrease in Net Assets (136,106) (146,206) - (282,312)

Net Assets at Beginning of Year 4,286,156 (741,127) (212,721) 3,332,308 Net Assets at End of Year 4,150,050$ (887,333)$ (212,721)$ 3,049,996$

DETAILS OF CONSOLIDATIONSTATEMENT OF ACTIVITIES

For the Year Ended June 30, 2017

TALLER SAN JOSE HOPE BUILDERS AND SUBSIDIARY


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